WHAT IMPACT SHOULD WE EXPECT FROM THE MINIMUM WAGE? Adair Turner Policy Studies Institute 2nd...

WHAT IMPACT SHOULD WE EXPECT FROM THE MINIMUM WAGE?

Adair Turner

Policy Studies Institute

2nd December 2002

2

Expectations and Fears

For

Alleviation of in-workpoverty

Encourage higher value

focus• investment, training,

productivitiy

Against

Loss of competitiveness• destruction of jobs

3

Employment and Unemployment 1992-2002

68

69

70

71

72

73

74

75

76

1992

Q2

1992

Q4

1993

Q2

1993

Q4

1994

Q2

1994

Q4

1995

Q2

1995

Q4

1996

Q2

1996

Q4

1997

Q2

1997

Q4

1998

Q2

1998

Q4

1999

Q2

1999

Q4

2000

Q2

2000

Q4

2001

Q2

2001

Q4

2002

Q2

Em

ploy

men

t ra

te %

0

2

4

6

8

10

12

ILO

Une

mpl

oym

ent

rate

%

Employment rate Unemployment rate

Source: Labour Force Survey

4

Beneficiaries of the NMW: Third Report Estimates

1.30.95

1.4

0.2

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

April 1999 June/October 2000 October 2001

Mill

ions

Source: LPC Third Report

5

Minimum Wage and Average Earnings April 1999-October 2002

16.7

16.0

0 2 4 6 8 10 12 14 16 18

Increase in NMW

Increase in AEIheadline

Percentage increase in adult NMW and average earnings

Source: ONS Average Earnings Index Headline RateNote: Increase in AEI headline is to September 2002

6

Possible Effects

• Redistribution through higher prices

• Redistribution but with reduction in sectoral demand

• Redistribution through lower margins

• Redistribution resisted - differentials restored

• Productivity enhancement– Capital/labour substitution– Training– Work elimination (service redefinition)

• Loss of external competitiveness

7

Conditions for different effects

Redistribution through higher prices Low (nil) price elasticity of demand (forproduct category)Margins at competitive equilibrium level

Redistribution but with reduction insectoral demand

As above but high price elasticity- for overall product- or between formal and informal sector

Redistribution through lower margins Monopsony margins to be squeezedOr - competitive margins squeezed viabarriers to exitOr – temporary squeeze due toprice/wage timing

Redistribution resisted- differentials restored

Conventional wage bargaining structuresor business needs for incentives

Productivity enhancement- Capital/labour substitution- Training- Work elimination (service redefinition)

Inherent characteristics of the job –potential for change

Lost of external competitiveness Traded sector of the economy

8

First and subsequent order employment effects

Redistribution through higher prices Nil effect

Redstribution through lower monopsonymargin


Nil direct effect Overall effect depends on macro

consequences of wage inflation

Redistribution but with reduction insectoral demand

Redistribution though lower margins –provoking exit

Productivity enhanced

Loss of external competitiveness

Negative direct effect Overall effect depends on overal

labour market efficiency – speed ofemergence of alternative jobs

9

Percentage of Adult Jobs Paid Below £4.30 per hour, April 2002

Source: Grossed NES data, 2002

0 5 10 15 20 25 30

All other sectors

Textiles, Clothing

Security

Retail

Social care

Hairdressing

Hospitality

Cleaning

Percentage of adult jobs

10

Number of Adult Jobs Paid Below £4.30 per hour, April 2002

0 100,000 200,000 300,000 400,000 500,000

All other sectors

Security

Hairdressing

Textiles, Clothing

Social care

Cleaning

Retail

Hospitality

Number of adult jobs

Source: Grossed NES data, 2002

Low-paying sectors account for 56 per cent of all adult jobs paid below £4.30

11

Total Employee Jobs in Low-paying Sectors June 2002

0.1

0.1

0.2

0.4

0.4

1.7

2.7

0.0 0.5 1.0 1.5 2.0 2.5 3.0

Hairdressing

Security

Textiles & clothing

Cleaning

Social Care

Hospitality

Retail

All employee jobs (Millions)

Source: ONS

Low-paying sectors account for 22 per cent of all employee jobs

12

Employee Jobs in Retailing

2,300,000

2,350,000

2,400,000

2,450,000

2,500,000

2,550,000

2,600,000

2,650,000

2,700,000

2,750,000

2,800,000

2,850,000

Ma

r-9

8

Jun

-98

Se

p-9

8

De

c-9

8

Ma

r-9

9

Jun

-99

Se

p-9

9

De

c-9

9

Ma

r-0

0

Jun

-00

Se

p-0

0

De

c-0

0

Ma

r-0

1

Jun

-01

Se

p-0

1

De

c-0

1

Ma

r-0

2

Jun

-02

All

empl

oyee

jobs

Source: ONS

13

Effect, Conditions and Applicability: Retail Sector

Redistribution throughhigher prices

Low price elasticityCompetitive equilibrium

Redistribution but withreductions in demand

Higher price elasticity

For whole sector priceelasticity cannot be high

Redistribution throughlower margins

Monopsony marginsBarriers to exitTransitional effects

?


Conventional bargainingstructure – or incentivesessential

?

Productivity enhancement Inherent job characteristics Significant potential toreduce service levels, e.g.longer queues

Loss of externalcompetitiveness

Traded sector Not applicable

14

Operating Surplus as % of Output by Sector 1998-2000

0

10

20

30

40

50

60

70

Agr

icul

ture

,fo

rest

ry &

fishi

ng

Min

ing

Man

ufac

turin

g

Pow

er

Con

stru

ctio

n

Dis

trib

utio

n &

hosp

italit

y

Tra

nspo

rt,

&co

mun

ctns

Bus

ines

s &

finan

ce

Pub

lic A

dmin

& d

efen

ce

Edc

tn,

heal

th&

soc

ial w

k

Oth

Ser

vice

s

All

Indu

strie

s

Gro

ss o

pera

ting

surp

lus

as p

erce

nt o

utpu

t

1998 1999 2000

Source: ONS Blue Book

15

Corporations Gross Operating Surplus as % GDP and GDP Growth 1980-2002

-10

-5

0

5

10

15

20

25

30

1980Q1

1982Q1

1984Q1

1986Q1

1988Q1

1990Q1

1992Q1

1994Q1

1996Q1

1998Q1

2000Q1

2002Q1

per

cent

Corporations gross operating surplus as % GDP GDP growth rate

Source: ONS Economic Trends

16

Increases in Hourly Earnings for Employees Aged 18 and over, 2001-2002

0

2

4

6

8

10

12

1 6 11 16 21 26 31 36 41 46 51 56 61 66 71 76 81 86 91 96

Percentile of Hourly Earnings Distribution

Per

cent

age

incr

ease

s

Source: Grossed NES April 2001-2002

17

Difference in Hourly Earnings Increases versus Median by Percentile 2000-2002


-4

-2

0

2

4

6

8

1 6 11 16 21 26 31 36 41 46 51 56 61 66 71 76 81 86 91 96

Per

cent

age

incr

ease

in p

erce

ntile

ear

ning

s m

inus

pe

rcen

tage

incr

ease

in m

edia

n ea

rnin

gs

2000-2001 2001-2002

£5.70ph

18

Difference in Hourly Earnings Increases Compared with Median by Percentile

1998-2002


-5

0

5

10

15

20

25

30

35

40

1 6 11 16 21 26 31 36 41 46 51 56 61 66 71 76 81 86 91 96

Per

cent

age

incr

ease

in p

erce

nitle

ear

ning

s m

inus

per

cent

age

incr

ease

in m

edia

n ea

rnin

gs

1998-2002

£5.00ph

19

Difference in Hourly Earnings Increases versus Median by Percentile:

Low-paying sectors 2000-2002


-3

-2

-1

0

1

2

3

4

5

6

1 6 11 16 21 26 31 36 41 46 51 56 61 66 71 76 81 86 91 96

Pe

rce

nta

ge

incr

ea

se in

pe

rce

ntil

e e

arn

ing

s m

inu

s p

rece

nta

ge

incr

ea

se in

me

dia

n e

arn

ing

s

£5.00 per hour

20

Employee Jobs in Hospitality

1,400,000

1,450,000

1,500,000

1,550,000

1,600,000

1,650,000

1,700,000

Ma

r-9

8

Jun

-98

Se

p-9

8

De

c-9

8

Ma

r-9

9

Jun

-99

Se

p-9

9

De

c-9

9

Ma

r-0

0

Jun

-00

Se

p-0

0

De

c-0

0

Ma

r-0

1

Jun

-01

Se

p-0

1

De

c-0

1

Ma

r-0

2

Jun

-02

All

empl

oyee

jobs

Source: ONS

21

Effect, Conditions and Applicability: Hospitality Sector



Redistribution but withreductions in sectoraldemand


Possibly higher priceelasticity than retail -with somecompetitiveness issues(in some sub-sectors)

Volume movements inlast year affected byspecial factors (foot &mouth, terrorism)



?



Same empirical results asfor retailing

Productivity enhancement Inherent job characteristics Significant potential torebalance service levele.g. queue length


Traded sector Applicable in somesubsectors - but otherfactors dominate

22

Impact of October 2001 increase – firms reporting increased use of new technology/processes: %

0 2 4 6 8 10

Hairdressing

Childcare

Social Care

Business Services

Retail

Textiles

Hospitality

Percentage of all respondents

Source: LPC Postal Survey

23

Employee Jobs in Social Care

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

500,000M

ar-

98

Jun

-98

Se

p-9

8

De

c-9

8

Ma

r-9

9

Jun

-99

Se

p-9

9

De

c-9

9

Ma

r-0

0

Jun

-00

Se

p-0

0

De

c-0

0

Ma

r-0

1

Jun

-01

Se

p-0

1

De

c-0

1

Ma

r-0

2

Jun

-02

All

empl

oyee

jobs

Source: ONS

24

Effect, Conditions and Applicability: Social Care



Redistribution but withreductions in sectoraldemand


Price elasticity (in free-market) likely to be higherthan retailing



But prices largely set bylocal authoritymonopsonist purchasers



Same empirical results asother sectors

Productivity enhancement Inherent job characteristics Potential limited by face-to-face service and regulationof care standards



25

Impact of October 2001 increase – firms reporting a decrease in profits: %

0 10 20 30 40 50 60

Textiles

Business Services

Retail

Hairdressing

Childcare

Hospitality

Social Care

Percentage of all respondents

26

Registered Nursing Beds in Nursing Homes, 1995/6 to 2001, England

0

50,000

100,000

150,000

200,000

250,000

1995-96* 1996-97* 31 March1998

31 March1999

31 March2000

31 March2001

Year

Num

ber

of r

egis

tere

d be

ds

General nursing homes Mental nursing homes Private hosp+clinics

Source: Department of Health

27

Employee Jobs in Cleaning

0

100,000

200,000

300,000

400,000

500,000

600,000M

ar-9

8

Jun-

98

Sep

-98

Dec

-98

Mar

-99

Jun-

99

Sep

-99

Dec

-99

Mar

-00

Jun-

00

Sep

-00

Dec

-00

Mar

-01

Jun-

01

Sep

-01

Dec

-01

Mar

-02

Jun-

02

All

empl

oyee

jobs

Part-time Full-time

Source: ONS

28

Effect, Conditions and Applicability: Cleaning





Price elasticity may besignificant due to ability toredefine service level (seeproductivity below)



Margins heavilydetermined by contractingterms – public sector keyproblem (but improving)



Same as other sectors

Productivity enhancement Inherent job characteristics Some capital/laboursubstitution!

Significant service levelredefinition

Some shift to full-time



29

Employee Jobs in Textiles and Clothing

020,00040,00060,00080,000

100,000120,000140,000160,000180,000

Mar

-98

Jun-

98

Sep

-98

Dec

-98

Mar

-99

Jun-

99

Sep

-99

Dec

-99

Mar

-00

Jun-

00

Sep

-00

Dec

-00

Mar

-01

Jun-

01

Sep

-01

Dec

-01

Mar

-02

Jun-

02

All

empl

oyee

jobs

Textiles Clothing

Source: ONS

30

Effect, Conditions and Applicability: Textiles and Clothing





Competitiveness effectdominates not absoluteprice elasticity for thecatergory Some formal to

informal sector shift



Margin squeeze (+subsequent exit) couldresult fromcompetitiveness effect



As for other sectors

Productivity enhancement Inherent job characteristics Significant theoreticalpotential – limited evidenceon scale of response


Traded sector Acceleration of inevitabletrend

31

Impact of 2001 NMWIncrease on Training Provision

Provided training in past 3 years

IncreasedTraining

DecreasedTraining

No Change

Workers aged 16-17 82 17 15 69

Workers aged 18-21 88 17 13 70

Workers aged 22 or over 84 16 13 71

Source: LPC Postal SurveyNote: Base, all firms affected by the October 2001 increase in the National Minimum Wage in any way, and employing workers in the relevant age group at the time of the survey, and providing training to their staff (final three columns only).

% of affected firms which:

32

Some Conclusions?Redistribution via higher prices Primary impact?

Redistribution but with reduction indemand

Unclear Some formal informal economy

effects in textiles and hairdressing?

Redistribution through lower margins Short-term oscillations due tobig/small increases

Long-term effect unclear – theorysuggests small

Social care special case due toregulation and monopsonist customer


Contained effect – minimal macroproblem

Productivity enhancement Capital/labour substitution Training Work elimination/service redefinition

Minimal impact

Possibly significant in some sectors e.g.cleaning

Loss of external competitiveness Acceleration of textile sector trends

33

Gains for Working Age Households, from Minimum Wage and Tax Credits 1997 - 2001

Source: HM Treasury

0.00

5.00

10.00

15.00

20.00

25.00

Bot

tom

2nd

3rd

4th

5th

6th

7th

8th

9th

Top

Ave

rage

Gai

ns b

y In

com

e D

ecile

£ p

er w

eek

Minimum Wage Child support WFTC

34

Optimal Redistribution ApproachVia Minimum Wage Via tax and benefit

systemRedistributive effect Gainers Widespread Targeted Losers

Via price Via margin

Proportional?Mildly progressive?

Can be progressive

Potential evasion Significant – depends onlevel

Low given smallincremental impact

Employment destructiondanger

Low at prudent levels would rise with level

Minimal given smallincremental impact

Incentive to work effect Positive – but withdifferential squeezeeffects

Positive – but with tapercomplexities

Status/sense of worth Strong Strong if through taxcredit system?

Resistance to higher taxburden

Not applicable Possible constraint

WHAT IMPACT SHOULD WE EXPECT FROM THE MINIMUM WAGE? Adair Turner Policy Studies Institute 2nd...

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